It is a tricky time to be an investor in UK equity income funds due to the uncertain outlook for dividends in 2016, high stock market volatility and the apparent suggestion we are heading towards the end of a cycle which started in 2009.
There have been a broad range of conditions in which to invest over recent years including several periods where equity markets have strongly rallied and other where they’ve suffered sharp falls.
Over this period dividends have also broadly risen but, as many have noted, 2016 could well see some more painful cuts on a stock level.
In this article we delve into the IA UK Equity Income sector and take a look at five funds that have outperformed the FTSE All Share index in each of the past six year full calendar years (and in some cases beyond) as well as currently offering an attractive dividend yield of close to or more than 4 per cent.
Of course, this comes with the caveat that a current yield has its limitations in term of what it tells you about future levels of income.
Threadneedle UK Equity Alpha Income
First up we have this portfolio co-managed by FE Alpha Manager Leigh Harrison since launch in 2006 and Richard Colwell, who joined in 2010. The £889m fund has beaten the FTSE All Share in every full calendar year since launch except 2009 and is ahead of the index in 2016.
According to FE Analytics, it has made 93.44 per cent, compared to a sector average return of 57.04 per cent and a gain in the FTSE All Share of 50.33 per cent.
Performance of fund, sector an index since launch
Source: FE Analytics
Perhaps more importantly it has paid out the most out of any of the funds that feature in this article over the past seven years. An investor putting in £10,000 in January 2009 would have seen a pay-out of £4,885 in income.
The fund has a clean ongoing charges figure (OCF) of 0.88 per cent and a current yield of 4.5 per cent.
Richard Colwell has been a named manager on this £3.1bn fund since 2010 but has only been solely responsible for the portfolio since last year.
Performance of fund, sector an index since launch
Source: FE Analytics
There is a strong overlap between this fund and Threadneedle UK Equity Alpha Income but the former is more concentrated, having 30 holdings whereas this fund has 50.
They have both performed similarly from the point of view of total return over three and five years with this fund marginally ahead over the former and Threadneedle UK Equity Alpha Income ahead by a 4 percentage points over five years.
The team at Square Mile points to Colwell’s portfolio as being a “sensibly run UK equity income fund”.
“The yield requirement does lean the portfolio towards more valuation dependent situations as opposed to growth opportunities though the managers strive to keep a broadly balanced approach as much as the income requirement allows,” Square Mile said.
The fund has a clean OCF of 0.82 per cent and a current yield of 4.3 per cent.
Matt Hudson’s £595m Schroder UK Alpha Income fund has outperformed the FTSE All Share in eight of the last 10 calendar years (2009 and 2006) as well as since he took over in 2005 but it is the only here to be more volatile than the index over the past seven years.
Hudson’s process is based on the business cycle, as are many ex-Cazenove funds, with holdings rotated depending upon the stage of the economy Hudson believes we are in. His top 10 currently includes Vodafone, BP, BAT, HSBC and Shell but the manager has previously held less ‘defensive stocks’.
Over his tenure the fund has clocked up a return of 129.97 per cent versus a sector average return of 100.85 per cent and a gain in the FTSE All Share index of 97.48 per cent.
Performance of fund, sector an index over 5yrs
Source: FE Analytics
Adrian Lowcock, head of investing at AXA Wealth, is a fan of the portfolio and says that Hudson’s move into defensive stocks such as pharmaceuticals is wise.
The fund has a clean OCF of 0.91 per cent and a current yield of 4.73 per cent.
Next we have the largest fund on our list: FE Alpha Managers Adrian Frost and Adrian Gosden’s £6.9bn Artemis Income fund, which they co-manage alongside Nick Shenton who joined the duo in 2014.
In each of the past 10 full calendar years the fund has been ahead of the index in every year apart 2010, 2009 and 2007.
This has meant the fund is comfortably ahead of the index and sector average over five and 10-year periods as well as delivering lower volatility and a lower maximum drawdown.
Performance of fund versus sector an index over 10yrs
Source: FE Analytics
The managers’ focus on companies' with high free cash flow generation to find income opportunities has meant the current largest positions include defensive favourites such as Imperial Tobacco, AstraZeneca and GlaxoSmithKline as well as more ‘value’ stocks such as Lloyds, HSBC and Shell.
Square Mile says this strategy of moving away from the more traditional income stalwarts and by combining stock selection with a view on the macro environment is quite different to many of its peers.
“The manager ultimately looks to provide a blend of companies with different characteristics whose fortunes do not rise and fall together, as may be the case with a portfolio made up of purely high yielding blue-chip names,” it said.
The fund has more than 73.9 per cent of its assets in mega and large-cap companies as well as 22 per cent in mid-caps and some 2.2 per cent in small caps and the rest in cash.
The fund has a clean OCF of 0.79 per cent and a current yield of 3.94 per cent.
Last up is much smaller fund, run by Hugh Yarrow. The manager of the £373m Evenlode Income fund invests in a small pool of about 80 stocks, that results in a very concentrated portfolio of about 35 holdings.
Most of these are ‘quality’ mega-cap names such as Unilever, Diageo, AstraZeneca, GlaxoSmithKline and Imperial Tobacco but the manager also has a quarter of his fund in small and mid-cap companies.
This has worked well for the fund since it launched in 2009. The fund has returned 99.59 per cent since launch compared to an IA UK Equity Income sector average gain of 71.44 per cent.
Performance of fund, sector an index over 5yrs
Source: FE Analytics
The fund narrowly underperformed the index in 2012 by 0.34 per cent, but as this is a narrow amount we have included it in the article.
Yarrow has many fans in the wealth management, discretionary side as well as a large amount of cash from the Jupiter Merlin fund of funds team.
The fund has a clean OCF of 0.95 per cent and a current yield of 3.9 per cent.
